FINANCE: Real estate investors should worry about being caught late in the cycle, and should prepare themselves for a downturn “in the next few years”, according to LaSalle Investment Management’s head of research and strategy, Jacques Gordon.
“Where we are in the real estate cycle is one of the most commonly asked questions of real estate investment managers and with good reason. Investors are now concerned about being caught late in the cycle and question what might happen if capital markets turn away from property. Timing strategies are difficult to apply to a relatively illiquid asset class like real estate. Nevertheless, adjusting portfolios as assets and markets move through their respective cycles can improve performance by enhancing returns and reducing risk,” he said.
International property investors will need to prepare themselves for a world in which interest rates will rise more quickly in some countries than others, Gordon said. Investors should make sure that they have exposure to jurisdictions where growth and rates will remain “lower for longer”, such as Japan and Western Europe, he advised in LaSalle’s Investment Strategy Annual, released this week.
Buyers of commercial property should invest in “secular”’ trends, such as technology, demographics and urbanisation, rather than relying on the property cycle to deliver returns, the ISA said.
While Europe will be the slowest-growing region, prime office markets in gateway cities such as London and Paris will “continue to strengthen” due to strong fundamentals and lack of new supply. Niche UK assets such as student housing, hotels and assisted living will outperform.
Other themes identified by this year’s ISA are that money will continue to flow into real estate given the sector’s premium to investment-grade bond returns, and the increasing levels of debt available for commercial property. These two themes will mean that prices will rise, returns will fall and that conditions will increasingly become ripe for new development.
